Want to focus on newer metric that will make sense in 3-5 years: Pravin Rao, Infosys

NEW DELHI: Talking to ET Now, Pravin Rao, COO, and MD Ranganath, CFO, Infosys, say in the last two years, nearly 50% of growth has come from new software and services.

Edited excerpts:

How has been your profit margins?

MD Ranganath: If you look at the last two years, our operating margins have been steady, they are in a very narrow band of 24.7 to 25 now. That was possible despite the pricing headwinds, despite the currency movements and volatile movements in British pound and so on. That was possible primarily because of very laser sharp focus on operational efficiencies and that was one of them and there were multiple things that we worked on.

Coming to this year, though we ended last year at 24.7%, we give margin guidance of 23% to 25% keeping into account two primary things. One of course is the rupee because the rupee on an average basis, has already appreciated 3.5%.

The second factor was the investment in the US talent model and of course the compensation. These factors have already been taken into account, and we give 23% to 25% margin even though we exited last year at 24.7%.

Coming to Q1, it has been stable at 24.1%, the same as last year. However, sequentially it has declined and the main reason of course is very strong focus on the operational efficiencies. 84% sequentially from 82% to 84% year on year. Utilisation was 76.5% last year and this year it is 80%. These are all the factors. At the same time, we will be announcing the compensation in the effective Q2 that is going to have some impact on the margins and at the same time, we had to watch the rupee and we also have to see how our US talent ramp up is going to happen during the balance year. That’s why our margin band stays at 23% to 25% though we had 24.1% in the first quarter.

In terms of the total TCV value, you have said you had this target of one billion per quarter. What has happened to that target and TCS mentioned stress in BFSI, in retail which is also a big vertical for you. Is that a secular trend that you are seeing?

Pravin Rao: On the TCV, it is similar to last quarter’s, around 800 million or so. That has been the consistent run rate over the last few quarters and big part of it in the last few quarters has been mostly renewals. So we will continue to focus on large deals because that is critical for a period of time in terms of capturing market share.

But over a period of time, that will become irrelevant because the focus will be on new services, new software. It will be mostly development oriented. It will be smaller ticket size and so on. Before starting this quarter, we started announcing percentage of revenue from new services and new software and as we said earlier, in the last two years, nearly 50% of our growth has come from this services and new software.

Going forward, we want to focus on this newer metric which makes sense in the three to five year transformation journey we are undertaking. It is not that we are going after large deals. We will continue to fight aggressive but the metric for a period of time will become irrelevant so we want to move away from that.

On BFSI, and retail, this quarter’s performance is on expected lines. In the last few quarters, we have demonstrated superior positioning in BFSI space and we continue to capture market. We continue to see good opportunities in rest of the world as well as in Europe. North America is little bit moderate at this stage but there is an expectancy that with the interest rates and lower pressure on the regulatory side, spend will come back.

We have to wait and see but overall we are fairly optimistic, continue to be optimistic about the BFSI space.

Retail always is a challenge. It is difficult to predict. This quarter we had a good quarter but at the same time we have seen a record number of store closings and layoffs in this space. So, there is tremendous pressure on the traditional retailers as they compete with the big five technology companies in the space and at the same time continueing to invest in omni channels, supply chain, analytics and so on. The spend will be a little volatile and we are comfortable, confident in our ability to capture a fair share of spent the results outcomes will continue to be volatility.

Why the delay in articulating your capital allocation policy? What approvals are you awaiting considering the amendment has happened paving way for capital allocation?

MD Ranganath: Articulation is not delayed. That was done very substantively in April when a more predictable and comprehensive policy was announced.

But you are not getting into the specifics?

MD Ranganath: We are very specific in our capital allocation policy. We have outlined two pieces, we clearly said how much of future cash we will return to the shareholders. We have said 70% of free cash will be returned to the shareholder year-after-year up to 70%. Then again, we said up to Rs 13000 crore will be returned this year to the shareholders. So, it has been very specific and we also had said that we are a globally listed company where we have very large global shareholders. The mechanism requires certain approvals from multiple regulators. It has nothing to do with promoters, absolutely nothing to do with that. We are awaiting certain regulatory approvals.

You relocation to the US, are you concerned about escalating costs in the US because of the expensive hires ?

MD Ranganath: Not at all. As you know, this quarter our onsite employee cost as a percentage of revenue came down to 38.5% compared to 39.3% in the same period last year. We are focusing to optimise on multiple fronts. There are multiple initiatives that we are focussing on in the US. US talent model is one such initiative. In the next couple of quarters, it requires a very strong focus. That is the only reason.

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